Mobile phone taxes to slow sector’s growth

The need for modern communication
technology is unlikely to be achieved following the decision to hike mobile
phone airtime taxes to 12 per cent, making Tanzania and Uganda two countries
that charge the highest rates within the East African Community (EAC).

Communications is the fastest-growing
sector in Tanzania, with seven players in the local mobile telecoms industry
fighting for market share, forcing tariffs lower. Statistics show that mobile
phone subscribers rose 22 per cent to 25.6 million last year, helped by lower
tariffs.

According to the Tanzania Communication
Regulatory Authority (TCRA), mobile phone penetration stood at 47 per cent last
year while the number of internet users rose to 6 million by May 2012 from 5.3
million in the previous period.

The in-depth analysis is contained in
the PricewaterhouseCoopers (PwC) Tanzania report on the just presented 2012/13
budget estimates by the Minister for Finance and Economic Affairs, Dr William
Mgimwa in the National Assembly in Dodoma last Thursday.

“The increase in excise duty on mobile
telephone air time to 12 per cent from 10 per cent will make calls more
expensive and the business less profitable thus affecting both users and
operators,” stated the PwC report.

It said the excise duty on airtime of 12
per cent is likely to mean a need for higher tariffs that will add to an
already significant tax burden. Other levies on airtime include 18 per cent
VAT, 0.3 per cent local taxes and 1.1 per cent regulatory contributions.

The total indirect tax imposed on mobile
phone services in Tanzania will now increase to 32 per cent for every airtime
recharge voucher scratched, stated the PwC report.

The hiked taxes on telecom services could be
a challenging phenomenon as interconnection charges, the rate mobile phone
operators charge each other for calls made across networks, fell to 7.16 US
cents in January this year from 7.83 US cents in 2008.

Also a new interconnection rate due to
be put in place from January 2013 was expected to be lower. Vodacom Tanzania is
the market leader with a 43 per cent market share followed by Bharti Airtel (28
per cent), Millicom International Cellular’s (MIC) subsidiary Tigo Tanzania (22
per cent) and Zantel ( six per cent).

Other smaller players are state-run
telecoms firm Tanzania Telecommunication Company Limited (TTCL), Sasatel and
Benson, having tiny market share. Dr Mgimwa’s maiden speech set out the
objectives and targets of this year’s budget, including an increased Gross
Domestic Product (GDP) growth rate of 6.8 per cent from 6.4 per cent.

Also mentioned was the intention to
increase domestic revenues to 8.72tri/- representing 18 per cent of GDP
compared to an anticipated 16.9 per cent to June 2012.

However, if one compares the budgeted 2012/13
revenues to a 12 month extrapolation of the 9 month results to March 2012, it
does indicate an assumption that tax revenues will rise by around 27 per cent
to 8.07tri/- and non-tax revenues by around 78 per cent to 645bn/-).

“The target is a challenging one. Where
are these extra revenues expected to come from? Surprisingly there were no
increases in fuel taxes, which account for approximately 14 per cent of tax collections,”
queried PWC. Notwithstanding the tax increases made, the major question that
remains is whether the planned increase in revenues would be achievable.

The PWC also noted that although taxes
on heavy fuel oil have been removed, there is the introduction of excise duty
on natural gas for industrial use, a move apparently at odds with the stated
intention to control rising energy prices.

On the other hand, in a move to encourage the use of gas a VAT waiver has
been introduced for certain equipment used for the storage, transportation and
distribution of natural gas.

The areas that will be of particular
focus include the reduction of reliefs for investors registered with the
Tanzania Investment Centre (TIC) by way of a reduction of import duty on the
deemed capital goods from 100 per cent exemption to 90 per cent.

It is an
unclear proposal to subject such goods to a 10 per cent VAT on import instead
of the 0 per cent special relief, the report notes.

Similarly, the VAT proposal is unclear
as for most VAT registered taxpayers the special relief is not an exemption per
se but simply a mechanism to mitigate the risk of having VAT refund claims,
which take a significant time to process.

The risk in terms of investment
attractiveness arises in relation to the possibility of double taxation – as
well as uncertainty for example, on how valuations will be arrived at where the
underlying value of a transaction can be attributed to assets in a number of
countries not just Tanzania.